Gary Karz, CFA
Host of InvestorHome
Founder, Proficient Investment Management, LLC
On January 27, 2011 the Financial Crisis Inquiry Commission (Stanford Back-up Site) issued it's Final Report (back-up) on the Causes of the Financial and Economic Crisis in the United States. The online report is free, but those preferring a hard copy can order it from Amazon (where it was a best seller shortly after it was released) for about $8, while it is listed for $29 at the official web site. The FCIC web site also includes a huge collection of resources including Graphics, Reports, and Interviews. The FCIC concluded it's work as of 2/13/2010, although hundreds of interviews including Bernanke’s 2009 interview are being withheld by the Crisis Panel (apparently they will be made public in five years) and that has been questioned by some commentators.
The final report is extensive with over 500 pages (and includes over 80 pages of footnotes), but the report effectively includes three different conclusions. Initially, many of the commentaries expressed disappointment that the commissioners could not agree on the conclusions. But now that the report has been more widely read and digested, more experts have weighed in and argue that the commissioners generally agreed on many of the primary conclusions. The primary report represents the conclusions of the six democratic appointed commissions and FCIC Commission Chairman Phil Angelides discussed the report in this CNBC interview (2/3/2011). The second opinion is represented by the Dissenting Views By Keith Hennessey, Douglas Holtz-Eakin, and Bill Thomas, and the third opinion is offered by the Dissenting Views By Peter J. Wallison.
Commission member Keith Hennessy was also interviewed by CNBC (see Financial Crisis WhoDunIt) and he pointed to the three narratives presented by Douglas Elliott and Martin Baily of the Brookings Institution (in Telling the Narrative of the Financial Crisis: Not Just a Housing Bubble.)
- It was the fault of the government, which encouraged a massive housing bubble and mishandled the ensuing crisis.
- It was Wall Street’s fault, stemming from greed, arrogance, stupidity, and misaligned incentives, especially in compensation structures.
- “Everyone” was at fault: Wall Street, the government, and our wider society. People in all types of institutions and as individuals became blasé about risk-taking and leverage, creating a bubble across a wide range of investments and countries.
In Washington’s Financial Disaster, Frank Partnoy summarizes "These documents resemble not an investigative trilogy but a left-leaning essay collection, a right-leaning PowerPoint presentation and a colorful far-right magazine." Portnoy suggests "the reports are like three blind men feeling different parts of an elephant. The Democrats focused on the credit rating agencies’ conflicts of interest; the Republicans blamed investors for not looking beyond ratings. The Democrats stressed the dangers of deregulated shadow markets; the Republicans blamed contagion, the risk that the failure of one derivatives counterparty could cause the other banks to topple. Mr. Wallison played down both topics. None of these ideas is new. All are incomplete." Portnoy concludes that "Congress should try again."
Joe Nocera (co-author of All the Devils Are Here) writes in Inquiry Is Missing Bottom Line that he found the report's release "almost comical" and said the report has its strengths — and its weaknesses, but "has a kitchen sink quality that actually detracts from our ability to truly understand why the crisis took place." Nocera concludes that bubbles are examples of mass delusions, which are "part of the human condition, and no report, no matter how scathing, is going to change that. And thus the question really isn’t whether it will happen again. It’s when." Nocera's Devils co-author Bethany McLean weighs in and says the report "made for pretty great reading" in Hock Around the Clock: Wall Street's debt problem is different from yours in Slate.
Jonathan Weil at Bloomberg suggests the commission's report is a disappointment in his article titled Wall Street's Collapse to Be Mystery Forever (1/27/2011). Weil suggests (as have others) that "The report’s conclusions were obvious: The financial crisis was man-made and avoidable. Regulators and credit-rating companies blew it. Banks and homeowners borrowed too much. Companies such as AIG and Lehman Brothers had horrible governance. Ethics and accountability broke down. The government panicked when the crisis hit in 2008. And so forth." Weil argues that "The FCIC’s failure was predictable from the start" since Congress created a bipartisan panel, but "What was needed was a nonpartisan investigation directed by seasoned prosecutors (like Pecora was) who know how to cross-examine witnesses and get answers." Weil also argues that giving the commission a deadline gave witnesses who didn’t want to cooperate the opportunity to stall, plus Weil points out that the FCIC budget of less than $10 million was a fraction of that which Lehman’s bankruptcy examiner got ($42 million) to produce a 2,200-page report on it's failure. Weil had predicted over a year ago what was to eventually come out of the FCIC in Wall Street Fix Is In at Bank-Crisis Coroner (1/20/2010). Weil wrote then "So what are the odds the commission can conduct all these investigations by mid-December and do a thorough job? About zero, which clearly was Congress’s intent all along." More recently Weil wrote about What Vikram Pandit Knew, and When He Knew It (2/23/2011).
Barry Ritholtz (author of Bailout Nation) disagrees with Weil's mystery conclusion in No Mystery At All. He also offers his opinions on what several other commentators have argued to have caused the crisis in The Crisis Was Caused by [Insert Pet Peeve Here]. Ritholtz has commented extensively on his blog including pointing to The British Commission Response to the Financial Crisis (1/31/2011).
Yves Smith (author of ECONned) was one of those interviewed by the FCIC and she now asks Why are More than Half of the FCIC Interviews Being Withheld? (2/14/2011). Smith has been one of the most active commentators on the crisis and her prior posts included Is the House of Lords’ Crisis Inquiry Putting the FCIC to Shame? (1/27/2011), The FCIC, in Lockstep with the Officialdom, Refuses to Use the “C” Word (1/28/2011), They Suborned Brooksley Born (1/28/2011), FCIC Report Misses Central Issue: Why Was There Demand for Bad Mortgage Loans? (1/31/2011), and Paulson Denies Culpability in Crisis, Yet Even Bear Turned Down His Deals (2/13/2011). Paul Sperry (author of The Great American Bank Robbery: The Unauthorized Report About What Really Caused the Great Recession) asks Why Did the Financial Crisis Inquiry Commission Let Andrew Cuomo Off the Hook? (2/1/2011). See also Sperry GFC Survey
William Black bluntly asks How can the Architects of the Crisis Investigate it? (1/28/2011) and discusses what happens When 'Liar's Loans' Flourish (1/30/2011). Black also weighed-in on 1/28, 1/31, 2/1 and 2/2. Black testified before the FCIC on 9/21/2010.
Steve Keen says he "wasted a perfectly good day reading the report" in The FCIC Report: Sound and fury, signifying nothing (1/30/2011). Keen was voted the the economist who most cogently warned of the crisis (ahead of Nouriel Roubini, Dean Baker, Joseph Stiglitz, Ann Pettifor, Robert Shiller, Paul Krugman, and others) See also Keen GFC Survey. Ryan Chittum writes "The FCIC is supposed to answer the questions, not just raise them" in Financial Crisis Inquiry Commission FAIL in the Columbia Journalism Review (1/28/2011) and Gonzalo Lira says the report includes lots of BS.
Jennifer Taub has done a detailed summary about perceptions of the financial crisis and FCIC report in her articles mythbusters: telling the truth about the financial crisis, part i (1/31/2011), part ii (2/6/2011), and part iii (2/10/2011). See also Taub GFC Survey. In Financial Crisis Inquiry Commission: The Private Sector Failed (1/31/2011) Benjamin W. Heineman, Jr. writes that the initial critical reaction to the report "ignored a fundamental agreement among nine of the 10 members — a source of the report’s continuing importance. The bipartisan commissioners emphatically concluded that one of the primary causes of the meltdown was massive failure of private sector decision-making, especially in major financial institutions." Simon Johnson (co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown) shares his thoughts in Wall Street Knows Meltdown Was Just Bad Dream (2/6/2011).
Other commentators that were impressed with the report include John Cassidy in Two Cheers for the Financial Crisis Inquiry Commission from the NewYorker (1/27/2011) and Bill McBride on his blog. Mike Konczal calls the report "an excellent guide through the financial markets and how they’ve changed over the past 30 years, as well as the lead-up to the financial crisis" in The False Politicalization of the Final Report (See also On BAPCPA and the Ability to Determine Relative Importance of Causes).
Shahien Nasiripour wrote in the Huffington Post that Wall Street Appears To Have Violated Federal Securities Law (1/27/2011). Matt Taibbi (author of Griftopia) takes the next step in asking Why Isn't Wall Street in Jail? (2/18/2010) in Rolling Stone. There is also a 9 minute Video of Taibbi Talking Wall Street With Democracy Now (2/22/2011).
Michael Lewis (author of the best selling book about the crisis The Big Short) added his thoughts on the FCIC report in All You Need to Know About Why Things Fell Apart (2/15/2010). Entertaining and quotable as always, Lewis offers his Financial Crisis Causes numbers 1-4 and regarding the three separate commission conclusions, Lewis goes another direction stating "I hereby dissent from the dissent from the dissent. My dissent is different from all those other dissents, which is why I am dissenting." A couple of other excerpts from Lewis include the following.
- Wall Street leaders now understand that they made a mistake, one born of their innocent and trusting nature. They trusted ordinary Americans to behave more responsibly than they themselves ever would, and these ordinary Americans betrayed their trust.
- For at least two centuries the U.S. government has encouraged people who didn’t work on Wall Street to think of themselves as “equal.” Government policies have emboldened ordinary Americans to borrow money they never intended to repay, just like rich people do, and cowed the financial elite into lending it to them. You can’t forget to bear-proof the garbage cans, and expect the bears won’t notice.
I've come across a few polls about the crisis and FCIC report. In this A-F Poll from the WSJ nearly half the votes give the FCIC a grade of F. But in this poll on whether the crisis could have been avoided 86% agreed with the report that the crisis was avoidable.
On April 13, 2011 Senators Carl Levin and Tom Coburn released an even longer (over 600 page) report that is being described as harder hitting. Wall Street and The Financial Crisis: Anatomy of a Financial Collapse (4/13/2011) can also be downloaded via Scribd, the NYTimes, and FT. The Report Release and other Links are here at Levin's web site.
Initial media coverage on the Senate report include reports from Bloomberg (Goldman Sachs Misled Congress After Duping Clients: Levin and Video - Levin Says Goldman Misled Congress), CNBC (FCIC in the Crosshairs with FCIC Chairman Phil Angelides), Reuters (Senate panel slams Goldman in scathing crisis report), NYTimes (In Financial Crisis, No Prosecutions of Top Figures), Forbes (Criminal Charges Loom For Goldman Sachs After Scathing Senate Report), Fortune (Goldman report: last chance for perp walks?). Ives Smith comments in Senator Levin Claims Goldman Execs Perjured Themselves Before Congress on Mortgage Testimony and Jennifer Taub commented on 4/15/2011 in bipartisan senate panel report slams banks and bureaucrats: “please sir, i want some more”. See also Top Five Reasons that MBS Lawsuits Are Just Beginning (5/5/2011) from Isaac Gradman. In Roots of Crisis Buried Deep After Inquiry from Bloomberg (4/14/2011) Peter Wallison argued that we are getting close to the truth.
More recently some of the authors of best selling books about the crisis have weighed in on the Levin/Coburn report. In The Fine Print of Goldman’s Subprime Bet (6/6/2011), Andrew Ross Sorkin comes "to a different and perhaps unsatisfying conclusion for those readers looking for a big scalp: Mr. Blankfein wasn’t lying." Matt Taibbi responds in The Times' Andrew Ross Sorkin Gives Goldman a Rubdown (6/7/2011) and The 'Big Short' and Goldman's New Story (6/9/2011), while Barry Ritholz's readers comment on the debate between Sorkin and Taibbi here. Taibbi previously debated Megan McArdle on CNN. Yves Smith commented further in Goldman Sycophants of the World Unite! You Have Nothing to Lose but Your Virtually Non-Existant Reputations! from (6/10/2011). Bethany McLean comments in Goldman's Perjury Distraction (6/14/2011) and conludes "The evidence that Goldman misled the government is murky. The evidence that Goldman misled its customers, on the other hand, is fairly compelling."
Additional commentary and links regarding the FCIC report include the following.
- Wall Street Journal
- Report Details Wall Street Crisis (1/28/2010) - "As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression," Mr. Bernanke said, according to the commission's report. Of the 13 most important U.S. financial institutions, "12 were at risk of failure within a period of a week or two," the report quoted Mr. Bernanke as saying. After regulators let Lehman Brothers Holdings Inc. collapse in September 2008, one of the most vulnerable banks was Morgan Stanley, the report notes. Hedge funds pulled $86 billion in assets from the investment bank in the week following the Sept. 15 Lehman bankruptcy filing, stemming from concerns about Morgan Stanley's viability, according to a Morgan Stanley email at the time to the New York Federal Reserve titled "Liquidity Landscape." In an interview with the commission, former Deutsche Bank AG trader Greg Lippmann—who played a key role in facilitating short bets—told the commission that in 2006 and 2007 he handled trades for at least 50 hedge funds and "maybe as many as 100" betting that mortgage-backed securities would fall. An FCIC survey of some hedge funds found they had a total of $45 billion of short bets, which easily outweighed roughly $25 billion of bullish positions they had on mortgages.
- Head of Crisis-Panel Says Warning Signs Weren't Heeded (1/27/2011).
- What Caused the Financial Crisis? Congress's inquiry commission is offering a simplistic narrative that could lead to the wrong policy reforms by Bill Thomas Keith Hennessey and Douglas Holtz-Eakin (1/27/2011).
- Opinion Journal: History of the Financial Crisis (video) (1/27/2011)
- Culprits From Beltway Casting? The financial inquiry commission lets a crisis go to waste (1/28/2011)
- Crisis Commission Did Its Job Thoroughly and Fairly from Phil Angelides (2/4/2011)
- NYTimes Financial Crisis articles
- Financial Times
- Government panel report is more sizzle than steak from InvestmentNews.com (2/6/2011) listed major problems with the commission including (1) it was given a time limit for its investigations, (2) the Dodd-Frank financial reform law was passed before the commission finished its investigations, making the outcome almost irrelevant, and (3) Perhaps because the reform law likely would be passed before the commission reported, it wasn't asked to present proposals for changes in law or regulation. The hard copy included a cartoon by Roger Schillerstrom (may be accessible by clicking "Editorial Cartoons", "InvestmentNews", then mouse over "2-7-11") with a scene depicting the press conference and the Announcer at FCIC podium stating "WE FOUND WIDESPREAD FAILURE AT EVERY LEVEL..." to which someone in the audience retorts "INCLUDING THE COMMISSIONS REPORT".
- Non-Partisan FCIC Report Draws Partisan Dissent by Barbara Roper in the Huffington Post (2/1/2011)
- The Crisis Reports: A Literary Analysis from NPR (1/28/2011)
- Government report blames regulators and financial institutions for economic crisis in the Washington Post (1/27/2011)
- TheStreet argues in Financial Crisis Report's Glaring Omission (1/27/2011) that short sellers were not responsible for the collapse of Bear Stearns and Lehman Brothers.
- Financial Planning noted Who's NOT to Blame for the Financial Crisis? High-Frequency Traders (1/27/2011)
- FCIC Releases Final Report, Says Financial Crisis Was Avoidable from Advisorone (1/27/2011)
- What Caused the Financial Crisis? by Mark Thoma on his Blog (1/27/2011)
- what caused the financial crisis? the fcic report by Lawrence Baxter (1/27/2011)
- Michael Lewis (author of the best selling book about the crisis The Big Short) warns that the crisis Isn't Over in this Bloomberg video (1/27/2011). See also Crisis Panel Report Blames Wall Street, Washington from Bloomberg (1/26/2011)
- Financial Crisis: The Greatest Hits by Morgan Housel at The Motley Fool (1/28/2011)
- CNBC counted the most frequently mentioned individuals and firms in the report. (1/27/2011)
Last update 11/22/2011. Copyright © 2011 Investor Home. All rights reserved. Disclaimer